So at last the Supreme Court has issued its judgement in Deajan Investments Limited v. Benson and others [2013] UKSC 14. The Court, consisting of a panel of five Justices including the President and Deputy President, overturned the Court of Appeal (and the Upper Tribunal and LVT). The decision was a three to two decision with Lord Hope (the Deputy President) and Lord Wilson dissenting. The majority judgment was given by the President Lord Neuberger supported by Lords Clarke and Sumption.

In brief the facts are that Daejan had proposed to undertake major works to a property in which the Respondents were leaseholders. Daejan had cut short the last stage of the formal Section 20 Landlord and Tenant Act 1985 consultation process. Daejan had made an application pursuant to Section 20ZA of the Act to seek dispensation from the consultation requirements. During the original hearing, before the LVT, Daejan had offered to reduce the amount claimed by £50,000 to compensate the Respondents for any prejudice which they may have suffered, although it was not accepted that they had suffered prejudice.

The LVT concluded that this was a major breach of the consultation requirements and the need for transparency was paramount. The LVT did not accept that it could grant some kind of conditional dispensation. The matter was appealed and whilst some of the reasoning changed the decision was upheld.

So the matter came before the Supreme Court. It is worth highlighting that argument in this case was heard before the controversial decision in Phillips v Goddard [2012] EWHC 3650 on which we have previously blogged.

The Supreme Court found in favour of Daejan and overturned the earlier decisions. They have granted dispensation but on terms.

So why is all this important?

If Daejan had stood then Landlords would have faced a very hard task to obtain dispensation where they had not properly consulted. The Court has now ruled that whilst agreeing with the Court of Appeal that the effect on a Landlord was not relevant it was pertinent to take account of the prejudice which any leaseholder may suffer. The Court made clear that the consultation requirements are part of the broader statutory regulation of service charges and ensure that leaseholders do not pay for inappropriate works or pay unreasonable amounts. This is different from transparency per se.

If there has been a breach of the regulations it would then be for the Leaseholders to show some prejudice. The Supreme Court makes clear the obligation to do this is upon the Leaseholders but it would then be for the Landlord to re-but this prejudice and generally any LVT considering such a matter should be sympathetic to the leaseholders.

The court went on to rule that the LVT was entitled to impose conditions. These could be limiting the amounts or awarding costs of investigating the prejudice. In this case the court accepted that the sum offered of £50,000 appeared to have been picked out of the air but given that on all the evidence this was greater than the value of any prejudice to the leaseholders the LVT was entitled to grant dispensation subject to this sum being deducted from the total sum sought. The court also determined that it was reasonable for the leaseholders costs of dealing with the application for dispensation at the LVT to be paid by the landlord. The judgment expressly addresses this point in connection with the LVT’s very limited current costs powers and makes the distinction between this being “costs” in the normal sense of litigation and it being an amount payable as a condition of the grant of dispensation.

In practice it seems that dispensation will remain very fact specific. Landlords would in our opinion be foolhardy to think they can simply flout the rules and then subsequently make an application for dispensation. That being said where there is a breach the well advised landlord will be looking to make an application at the earliest opportunity and to consider what reasonable conditions they should offer.

With regards to Phillips v. Francis, whilst we are sure many property managers and landlords are concerned as to the effect this may have on present and past service charges (particularly given the fact they have been paid does not mean that they cannot be challenged!), this may offer some hope that a well prepared application for dispensation under section 20ZA will receive favourable treatment.

What is clear is that each application and set of circumstances will need to be considered on its own merits.

I think that the Supreme Court’s ruling has undermined the legislation in one particular respect. It used to be a common practice of unscrupulous landlords to organise a building contractor bidding ring from which they received a kick-back. Lessees paid inflated works costs even though the landlord appeared to have run an honest tendering process and taken the lowest bid. Part of the section 20 process allows lessees to nominate contractors whom the landlord must then ask to bid, thus preventing this practice. If the flagrancy of the landlord’s disregard for the section 20 process is not to be taken into account, but only the disadvantage to the lessees, a landlord (unlike Daejan, who met much of their section 20 obligations) might decide to hire contractors and start work without any prior consultation. How then are lessees to meet the burden of proof put on them by the Supreme Court’s ruling and determine whether or how much they have been disadvantaged? I hope you are right in believing that the grant of dispensation will remain “fact specific”. My concern is that the facts may be impossible to ascertain.